Critical Chain - Eliyahu M. Goldratt [69]
"Is this an answer or a question?"
"More of a question," he admits.
"But you do know the answer. Let me guide you. We invest in a project in order to get something that will bring us benefits."
"Of course."
"Therefore, it must be that the penalty of not finishing on time is related to the delay in getting the expected benefits."
Everybody nods.
"Brian, let's go back to your specific case. Why is your company investing, how much did you say, six million, to expand the plant? What benefits do they expect?"
"We need the capacity." Responding to my signal to proceed, Brian adds, "We have a very nice product line, of which we cannot supply enough to the market. I see now. The damage to the company will be the delay in getting the additional sales." "We want to quantify it," I remind him. "Now, a minute ago you were not sure if we need to know ‘expected sales.' Do we need it?"
"Without a doubt."
I smile. "I told you that you know the answer. Just think clearly, that's all."
They laugh.
"Now that we've agreed that we need to know expected sales, can you tell it to us? How much more will your company sell due to the additional capacity?"
"The forecast is two million per month. A very conservative forecast. The consensus is that once we are up and running we will surpass it."
"Fine," I say. "Can we now answer ‘what is the penalty of a delay?' Or do we need more data?"
"What are the margins on this product line?" Fred asks. Before Brian can answer, I step in. "Fred, why do you want to know?"
"Because otherwise how can I calculate the impact on the bottom line?"
Remembering what I've learned from Johnny, I interject,"Margins are a lousy way of determining it, but for establishing order of magnitude it will suffice," and I gesture to Brian to answer Fred's question.
"It's a very good product," Brian explains. "The net margins are over thirty-five percent."
Now that there are more facts on the table, I repeat my question. "What is the penalty for the company of a one-month delay in completing the expansion project? Brian?"
He doesn't answer.
"Two million dollars sales per month times thirty-five percent net margin . . ." I feed it to him with a spoon.
"Seven hundred thousand dollars a month. I know how to multiply. But I don't buy it. This money will not be lost, it will just be postponed. Ah, I need to know the interest rate."
"Forget the interest!" Fred tries to help. "Did you ever hear about cash flow?"
"Cash flow is very important," I agree. "But in this case, also net profit is lost. Brian, why do you claim that money is not lost, only postponed? Because you assume that sales will be there also in the future. What other piece of data do we need in order to examine your assumption?"
"I don't know." Nor does anybody else.
I try to help. "Brian, how long do you think your company will be able to command such hefty margins on this product line?"
"Nobody knows. Maybe two years, maybe three. I see your point. It's not just money delayed, a major portion of it is money gone forever." He swallows hard. "We are talking about hundreds of thousands per month. That's huge."
Now I can return to my original question. "Do you think that the project team has a clear idea of the damage the company will suffer if the project is not finished on time?"
"No, they don't," he confidently answers.
"Not realizing the dollar impact of a one-month delay surely has an impact on the way your project team deals with your subcontractors?"
While he thinks about it I turn to the class. "It is surprising, but unfortunately this is the case everywhere. Most people involved in a project don't explicitly recognize the penalties associated with each month that the project is delayed."
"Before we start to discuss how we should negotiate with our vendors, I want every one of you to realize the magnitude of this phenomenon.
So, take your time and think about the projects you are involved in. Now that you know more, try to figure out the actual damage